That’s over at P3. But I’ve seen it elsewhere. The idea is that because we’ll need to keep unburnt oil in the ground to hit (or rather, to not hit) a 2 oC commitment, a pile of oil companies are wildly overvalued, leading to… well, who cares what it leads to, because it doesn’t matter.

As soon as the “market” expects that new regulation will seriously devalue an asset, its price drops. Bubbles only arise if the “market” is misinformed. The “market” is by no means infallible when it comes to pricing risk, but an expectation of “not much climate policy any time soon” strikes me entirely realistic

which is pretty well what I was going to say, so I won’t bother re-say it (note, BTW, that I’m of course not saying that I think sticking within 2 oC wouldn’t be a good idea. I think it would be an excellent idea. I’m just dubious about its plausibility). He continues with some econ-type stuff about how even if it were true it wouldn’t have the effects claimed, which seems plausible too, but I’m less interested in that. The Economist says about the same.

P3’s writeup says:

There’s a huge amount of evidence that… mainline financial analysts around the world are taking the argument on-board, and in a big way.

That’s hard to make sense of. If true, why aren’t the stock prices of oil companies tumbling? But I boldly plough on, to the report itself (Unburnable Carbon 2013: Wasted capital and stranded assets). And don’t find much. Perhaps I missed it; its quite long and I only skimmed it.

Refs

Comments

This is virtually the same argument I used to hear from peak-oilers, i.e. that the societal collapse would begin when the markets believed we had hit peak-oil, not necessary right at the moment that we actually hit peak-oil. It seemed like a weak argument to me. And it seems even weaker when applied to climate change.

Contrary to Tol, there is certainly the potential for a carbon bubble. That is because banks lend against their assets. If there is a sudden devaluation of a significant portion of their assets, that will lead to insolvency and a credit crunch. Europe, and particularly Greece, Spain, Italy, etc are experiencing right now what that looks like in the real economy, and the whole world felt it in 2008, so glib dismissals of the issue are far from convincing.

Having said that, it is far from clear that Carbon tracker have established the existence of a carbon bubble. Specifically, P1 assets have (by definition) a 90% chance of being brought to market. P2 reserves only have a 50% chance of being brought to market. These probabilities will be reflected in their market value. Further, these reserves, if they are brought to market, will be brought to market at some future date. Hence their value will be discounted based on the time it is expected to take to bring them to market. These factors combine such that reserves must form only a limited fraction of total company assets relative to current production.

The Carbon Tracker report takes some account of these factors, but is not explicit about them. The most explicit they get is a comment regarding coal that:

“Overall, a no growth scenario from 2020 would cut the discounted cash ﬂow (DCF) valuation of coal assets held by these companies by 44% today. The share price impact would, however, be reduced as these are diversiﬁed companies,
implying reductions of 4-15%.”

Taking that as representative, a 4-15% drop in fossil fuel company share value is not going make many (or any) banks insolvent as they also have diversified portfolios. So, apparently there is no carbon bubble at present. Never-the-less, a warning that continued investment on the assumption that carbon pricing or regulation will not become significant soon may create such a bubble.

Tol has his cause and effect backwards.
Instead of “fossil fuel assets not overvalued” because “no expectation of climate policy soon”, the reverse is the case:
“no expectation of climate policy soon” because “fossil fuel assets must not be overvalued”.

The problem is that there will be no rapid implementation of climate policy because to do so would cause market chaos.

[I don’t believe that, or at least not directly. The reason is that the public/pol complex isn’t ready to do anything that causes significant or visible pain. Market chaos would be just one manifestation of that pain; “costing people money” is a more obvious one -W]

An interesting corollary is that if and when governments are finally forced to get serious about climate policy, they will also ensure everyone invested in fossil fuel assets is appropriately compensated for the loss, to avoid any market collapse. And further, the extent of their ability to do this will limit the action they take (Bailing out the banks in ’08 will be puny in comparison).

So, by the very definition of a market bubble, this is a bubble. Fossil fuel assets *are* overvalued given what the physics says about how much must stay in the ground to meet current aspirations on limiting temperature change. But, as Tol concludes, nobody will prick the bubble. And as everyone knows this, everyone keeps investing in more fossil fuel-based infrastructure.

Just because nobody will prick it doesn’t mean it’s not a bubble.

Now, Tol’s argument about the market correcting itself over time is fine, if we’re successfully deflating the bubble slowly. But we’re not – we’re busy inflating it even further, by investing in more exploration, building more pipelines and power stations, building more ICEs, etc.

Finally, Tol argues that a bubble can only form if the market is misinformed. Well of course it’s misinformed. It’s probably the worst misinformation in the history of modern civilization. You only have to look at the difference between what the science says about the kind of emissions pathways we need versus the complacency of politicians, economists, and Richard Tol, to realised how bad the misinformation is.

[Again, I disagree. Doubly. First of all, I think “the market” is aware of all the research – if not all the details, then the broad summary. Exxon knows what the IPCC is saying, and it knows the IPCC is right. But secondly I *still* don’t believe that the IPCC is pushing prescriptions for future emissions. This comes back to the canonical “1. climate is changing 2. we’re causing it 3. it will continue in future (4. it will be bad)” which I first felt the need to write down in 2004 (http://www.realclimate.org/index.php/archives/2004/12/just-what-is-this-consensus-anyway/). mt posted very confusingly (IMHO) about this just recently (http://planet3.org/2013/04/28/the-five-points-on-climate/) and I attempted to talk about it but I just bounced off, so I gave up -W]

“As soon as the “market” expects that new regulation will seriously devalue an asset, its price drops. Bubbles only arise if the “market” is misinformed.”

That is nonsense. You agree with that?

Bubbles arise because of greed. We do not have a planned economy. If a sector of the economy is providing above average profits, investors pile in until after a suitable period of time the sector is oversupplied. There is no immediate signal saying – stop, stop – that is enough investment. The signal comes after the money has been spent.

Australia is in the middle/at the end of (not even our politicians are sure) of a massive mining investment boom predicated on growth in demand for mainly coal and iron ore from China. We will not know whether that is a bubble for a few years until (a) it all comes on stream and (b) the effect of China’s stated policy (“regulations”) of reducing the carbon intensity of its economy becomes apparent.

The market is not misinformed. The Chinese are making their intentions known. It is possible the investors either do not believe that they are serious or do not believe that it is possible. Given Australia’s coal barons also finance climate science/renewables denial, I would say that is highly likely.

Here is a specific example. The proposed mines in Queensland’s Galilee Basin will increase coal exports from Queensland by 150%. But to export coal from here requires 675 kms of rail line and massive expansion of port facilities (in the Great Barrier Reef).

Not infrastructure that can be built overnight. When do we find out that this investment (if it goes ahead) is a bubble William?

[I don’t know about your specific instance. I think it entirely likely that the companies intending to use the missing infrastructure have plans in place to ensure its completion – either building it themselves, or planning on leaning on the govt to build it for them. It seems to me that you’re mixing up “I don’t want this to happen” with “bubble” -W]

Don’t overestimate the intelligence of investors in the fossil fuel sector! In the Netherlands, way too many new power plants have been built in recent years. Generation capacity has doubled. Demand hasn’t. One reason for the overcapacity is renewable power from Germany, which they should have seen coming, but didn’t. Another reason is the economic crisis, which diminished demand. And third: they had a lot of money and wanted to invest it, and all chose to put it into fossil fuel plants. Wrong. The power companies have lost about 5-6 billion euros because of that, and will lose much more since the Netherlands has agreed to change its share of renewables from 4,4% to 16% in the next 7 years. The power companies say they don’t have the money to invest in wind parks. Because they wasted it all on unneccessary coal and gas plants.

Something similar may happen on the side of the producers of oil, coal and gas. They are all investing in finding new fossil fuels. Worldwide, more than 500 billion euros was invested in exploring new fossil fuel reserves in 2012. We can be sure all that money was wasted, because known reserves are already more than sufficient to cause enough warming to release much, much more carbon from permafrost and turn the planet into a place where life is possible only at and around the poles. A lot of the known fossil fuel reserves, and any new reserves that may be found, are really unburnable carbon.

One of the developers is Gina Rinehardt. Her advisers include Ian Plimer (also director of at least one of companies) and occasionally Lord Monckton (he suggested she take over Fairfax, our non Murdoch newspaper network which she then attempted to do).

Forget the morality of it. If you were one of Rinehardt’s advisers, what would you be telling her given your knowledge of climate science? Keep in mind that any investment would likely take a decade before it became cash flow positive.

[I’m confused now. I thought your objection was that the rail infrastructure wasn’t in place -W]

The performance of Fortescue Metals during the GFC is illustrative. They were so highly leveraged that they barely survived the drop in the iron ore price. A bubble does not require the coal market to collapse but for the current high prices to drop to the point that all the business plans agreed with the banksters collapse.

Here is a recent interview with Ross Garnaut who is very bearish on coal and China.
“It’s probably most problematic for thermal coal, where the focus on environmental issues is combining with the structural factors that I’ve mentioned and a slightly diminished rate of growth to undermine what were always unrealistic hopes in Australia of ever-increasing large growth in imports of thermal coal.”http://www.abc.net.au/lateline/content/2013/s3725364.htm

I am not having a go at you William. I am interested in your response.

My own view as an investor is that Galilee will be a bubble. I have read comments (possibly even here) that global temps could be flat for another decade without proving AGW wrong. But it seems to me the next El Nino will confirm the physics that we all know anyway. So why would I expect that coal would command higher prices or larger export volumes in a decade ? China is showing every indication that it takes climate change seriously. It is certainly throwing lots of capital at renewables. In Australia we are closing inefficient coal fired power stations because of the marginal penetration of solar PV and wind. It is highly unlikely that a new coal fired power station would ever be built here.

The reason the Chinese are giving a hard rethink to their environmental policies is because they are being forced to. They are considering their carbon policies because it is convenient for them to do so at the same time they are considering the other stuff, but it’s the other stuff that’s driving the rethink. From reports I’ve seen and heard about the severity of pollution in China, I infer that the Chinese government has a well-founded fear of losing the Mandate of Heaven. It seems that those in China who can afford it are turning to imported food–not just luxury items, but everyday stuff.

[It looks very likely that the Chinese are going to hit their “smog barrier” before they hit their “CO2 barrier”. Of course they may do what we did – clean up the particulates etc, and keep emitting CO2 -W]

Starting in 1988(cars rare) I used to go to Beijing and other places in China, usually every few years, ending ~2005 (lungs are valuable.) I used to walk along the Bund in Shanghai, a mega city built on flat land at sea level with river running through it.

The point of the carbon bubble is that it is a bubble, meaning that the market is overvalued. Either we leave the carbon in the ground or we severely damage our prospects via continuing and probably accelerating environmental damage. Either way the market prognosis is wrong. That is hardly unprecedented.

That there is little prospect of serious response anytime soon is unclear. It depends on your definition of “soon”, doesn’t it?

While the discount rate is key to why economics simply gets this problem drastically wrong, eventually the discounting of the future fails, and the rug stops covering what has been swept under it.

So your issue seems to boil down to how soon we will be paying the piper, not whether he will be back to collect what he is due. Like much of what faces us at the global scale, we know it will be a real, practical problem someday. We just don’t know when.

Everybody knew that the levees around New Orleans would break someday, but one could always argue that it would probably not be soon. I wonder why we haven’t learned the obvious lesson from that . Anyway you haven’t argued against the levees breaking, only against it being soon. I suggest that we don’t really know when the great storm will hit but that eventually it will.

[I disagree with much of that. First of all, I think you’ve missed the main point. Which is: the “carbon bubble” idea looks to me (and to DA) as an attempt to re-frame the GW problem in a manner that makes it look like a problem for the markets. Its an attempt to say something in financial terms: “look, you’re overvaluing these assets” is what they are saying at base. And since “bubble” is very fashionable after the 2007 crash, they’ve thrown in scary-sounding bubble terminology.

I, and DA, and Tol, are saying that just won’t work. Its just… naive. Childish. An attempt to play beyond their league. It will get swatted aside and barely noticed. It fundamentally misunderstands the problem. The companies owning these assets aren’t naive or stupid or ignorant. They know they want to sell this stuff. They know about GW. But they look around and they say to themselves “hmmm, does it look like there will be effective regulation of CO2 emissions? No”. Quite the reverse: people are worrying more about keeping up with global oil demand, and are desperate for the price of oil not to shoot up.

That’s part 1.

We could go for a digression on discount rates, but since Stern used ~0 and still didn’t get big numbers for damages, I think that’s not a useful digression at this point.

Part 2 is you saying that GW is going to look, globally, as bad as levees breaking on New Orleans. That’s up for grabs, but by no means certain. I’d give it less than 50%. Its incompatible with the SRES scenarios that go into the std.projections; or with the Stern report; or whatever. So I don’t think I believe the “and if we ignore these problems and merrily emit CO2, the market will suffer in the long run”. Or rather I do / could believe that, but with a “long run” that is too long for useful action -W]

” as an attempt to re-frame the GW problem in a manner that makes it look like a problem for the markets”

I don’t see that at all. If the bubble is valid it makes the case for mitigation harder to make, not easier.

[Then I don’t think you’re making much effort to see my point of view.

I think this (“the bubble”) reads very much like: “oh dear. We tried telling them that the science says that we need to reduce CO2 emissions; and they ignored us. Lets try telling them the same thing in a different way, as a sort-of market thingy”. Are you really completely unable to understand that framing? -W]

What I find odd is that many people in this debate seem to be simultaneously predicting Peak Oil (supply won’t meet demand, prices will rise to unaffordable levels, the economy is doomed) and the Carbon Bubble (supply will exceed demand, the economy is doomed). We are doomed because prices will be too high or, on the other hand, too low. We are doomed because we won’t be able to produce enough fuels to burn, on the other hand, it could be game over because we have over-invested and developed more reserves than we can burn.

Jeremy Leggett is Exhibit #1,since he runs the Carbon Tracker Initiative and writes the odd Peak Oil article, such as this one:

Now a cynic might say that anyone promoting investment in solar energy would be happy with either narrative. But I couldn’t possibly comment.

It’s physics alone, of course, that says we need to keep carbon in the ground to avoid climate change >2 degrees and nobody sensible disputes that. Adding tenuous “bubble” arguments to this already solid position is a distraction, I think.

[That I very much agree with -W]

It might well be that at the Nth UNFCC COP meeting (where N>20) the world will come to its senses and impose a carbon-pricing system that will drive down demand and, over a period over a few decades, eventually wipe out the fossil fuels industry. I hope so. But from a purely short and medium-term investment perspective, I don’t think it’s folly to bet against this happening soon.

The question of how bad it gets depends crucially on which emissions scenario we follow, of course. But it also depends on physical and geochemical phenomena on which economists are inexpert.

Hansen believes that we have enough net positive EROEI fossil fuels to actually boil the oceans. He says so explicitly in his book. I am reluctant to gainsay him – there’s little doubt he is more expert than I.

That being on the table,

[But no-one except Hansen believes the boiling-the-oceans nonsense, so no: you aren’t allowed to transition from “Hansen belives this” to “we must take this viewpoint seriously as the mainstream view”. It isn’t on the table -W]

the issue is not what climate change “costs” in a marginal sense, but when it stops being a small-signal quasi-linear problem altogether.

[No. Unless you mean something different to me for “conventional”. I’m sticking with Economics as the study of the rational allocation of resources. It will never become meaningless no matter how bad things get -W]

If you find any official economic reasoning that isn’t based on a tangent linear approximation, please let me know. The small signal worldview makes the big signals disappear by construction.

Most of economics breaks down when a discount rate becomes negative. This means, in our question, when consequences of carbon emissions are sufficient to cause aggregate well-being to decline exponentially over a long time period. You would think economists would be in a position to estimate this threshhold, but I’m unaware of any serious efforts to do so.

I think the idea that the proven reserves are unrecoverable presumes that we are flirting with an environmentally-driven collapse that in economic terms would amount to a negative discount rate, hence an essentially infinite cost.

On what do you base your 50/50 estimate that climate change will be benign? If it’s based on what economists say, I would say that’s begging the question.

[I didn’t say 50/50 that GW would be benign. I said “Part 2 is you saying that GW is going to look, globally, as bad as levees breaking on New Orleans. That’s up for grabs, but by no means certain. I’d give it less than 50%” You’ve completely misunderstood what I said in two crucial respects: I didn’t say 50/50, I said “less than 50%”. And I didn’t say benign: I said not-a-disaster. What do I base that on? That in physical science terms, its really really hard to find anything approaching disastrous effects. You need to go over to the ecological effects, and those are very uncertain. All serious attempts to estimate costs come out with smallish numbers. No? Which ones are you thinking of? -W]

What I find odd is that many people in this debate seem to be simultaneously predicting Peak Oil (supply won’t meet demand, prices will rise to unaffordable levels, the economy is doomed) and the Carbon Bubble (supply will exceed demand, the economy is doomed).

This is an excellent point. There are two possibilities: either the market believes that neither strict carbon regulation (which would cause prices to go down) nor peak oil (which would cause prices to rise) are likely in the near to mid term, or the market believes that both of these things are possible but the weighted average of these effects gives a fair price close to its current value. I think the first of these two is more likely, but I don’t know enough to rule out the second.

In addition, even if you think that fossil fuels are overvalued (and you may have good reason for thinking so), it doesn’t follow that there is a price bubble. That is a necessary but not sufficient condition for a bubble. Temporary price overshoots, and overinvestment in sectors, are things that happen from time to time in a capitalist system. Commodity prices fluctuate according to supply in demand, and the lag time in response to market forces is nonzero.

Finally, even if the “carbon bubble” position were the correct one, remember the old saying about the relative ability of markets to remain irrational and you to remain solvent. Quite a few people who noticed the housing bubble lost a lot of money betting that the bubble would pop, because they were too soon in making that bet.

It’s not hard to get the long term cost to essentially infinity (a sudden mortality spike, accompanied by famine, war, and general decline; we don’t need to go all the way to steamworld) with some plausibility, which rationally ought to dominate the conversation. I do not understand on what basis you are so comfortable dismissing that possibility.

My whole point is that all the “serious efforts” use small-signal methods on a large-signal problem. Nobody is equipped with the capacity to reduce the threats we face to currency. I don’t accept the methods being used to address the question.

Meanwhile, the problem with the reserves bubble isn’t that it’s an immediate threat; I think it isn’t. It’s that it immediately creates a perverse disincentive to deal with the climate problem. It makes all of us with any assets at all allies of the fossil fuel industry and their delaying tactics.

yep.. it is hard to see global signals looking through windows. And all this benefit-to-cost analysis and global warming wouldn’t be so bad because GDP will suffer only by a few percentage points bla bla bla… reminds my of why I despise (some/most (not sure about proportions)) economists (and those who blindly follow them). What was worse great depression or World War II? If you think that WW2 then you are so fucking wrong. Great depression was way worse. Actually WW2 was beneficial. This is what you will get if you only look at GDP.

There is a world beyond GDP and beyond market. Extinction rates already turns AGW into CAGW. And given that the most severe pain (at first) will be in poor regions the markets of course will not suffer much. As long as those pesky environmental refugees will not come by and will not break some fancy car then everything will be fine and so on! Given, that the people who will suffer are different (separated by generations/status and so on) than those who do the damage by enjoying their luxury style and prefer to live in self delusion – it is like trying to perform benefit-cost analysis or GDP predictions to slavery. Spoiler alert – slavery is beneficial.

[I agree entirely that there is a world beyond GDP; I support that view. However: if you’re concerned about GW (I am) and you’d like to think beyong GDP (me too!) then it make no sense to reframe GW as a GDP issue -W]

“At least one sentence in “Storms” will need to be corrected in the next edition: even with burning of all fossil fuels the tropical ocean does not “boil”. But it is not an exaggeration to suggest, based on best available scientific evidence, that burning all fossil fuels could result in the planet being not only ice-free but human-free.”

#24 “[I agree entirely that there is a world beyond GDP; I support that view. However: if you’re concerned about GW (I am) and you’d like to think beyong GDP (me too!) then it make no sense to reframe GW as a GDP issue -W]”

Good! At this point I am actually surprised to read this! I thought you were arguing the contrary. If you agree, what does (#19) [“All serious attempts to estimate costs come out with smallish numbers. No?”] mean?

[Its saying the same thing in a different way. Viewed as an economic problem, its hard to make GW serious -W]

I have been trying to say that we have two choices. Either we come up with a more appropriate metric for our long-range objectives and invent a new discipline of economics to help us think quantitatively about the distant future. As an engineer I’d prefer this.

[Ah, but that’s where I think you’re wrong (or at least ambiguous and confusing to anyone reading from the world of economics). We don’t need to “invent a new discipline of economics” AFAIK. We need to improve economics, yes, but not in revolutionary ways – for the basic theory. We need to use economics differently. Its no good saying “I want to maximise my (or my societies wealth). The approriate tool to help me do this is economics. Oh dear, I’ve just maximised my wealth at the expense of my well-being. Therefore economics must be wrong”. That’s as bad as “I’ve just hurt you by hitting you over the head with a spanner. Therefore spanners are bad”.

I’m hoping this is just a wording problem. But we seem to keep having the same, or very similar, wording problems. But the stuff below suffers from it -W]

Or we wing it, i.e., rely on intuition.

Either way, what the economists currently say is of little use in setting our destination; it is only important in steering.

When economists try to influence our distant future with reference to GDP on the way, they are like someone telling me to drive to Houston where I have no business rather than to Denver where I have a wedding to attend, because I’ll get better mileage heading downhill. It is just that ridiculous.

While I’m supportive of the main thrust of your comments, I would remind you that there are two very large branches of economics (ecological, environmental) that attempt to address many of the issues you’ve raised. perhaps you should speak to Paul Baer more about this. Don’t indict an entire field just because a particular strain (i.e. chicago school) is given more weight by politicians than it should.

back to a point i made earlier. isn’t Richard Tol the most egregious example of a stealth advocate there is in the climate debate? and if so why haven’t we heard from RPJr?

Let’s hope for geologically injectable nanotech designed to burrow down into the coal beds and extract the hydrogen, sending that to the surface through clean Buckytube pipes, and turning the leftover carbon atoms into diamonds. That’s economic optimistic cornucopianism at its best. And hey, who’s to say it won’t happen?

More seriously — thanks for pointing out that the Dutch companies guessed wrong and put their money into fossil fuel plants that aren’t needed. Too bad there’s no clean power source to plug into those in place of the burners; at least the heat exchangers and turbines ought to be useful. Maybe in thirty years when fusion’s online …

Marlowe, Paul Baer and I chat constantly. I do not mean to suggest that nobody but me has thought of these things!

Still, Stern, however much he sympathizes, is part of the problem; the presumption that economic activity is a goal in itself is thoroughly burned in to our institutions. Little pockets of resistance here and there in the academy have so far been of limited influence. Inevitably that will eventually change. Let’s hope that change is not too long in coming.

The problem isn’t with the tools, but the tool holding the tools
————————–
“When you question these policy conclusions, you typically get a lot of hand-waving. Well, the government is corrupt and in the pockets of rent-seekers. It does not have enough information to undertake the right kinds of interventions anyhow. Somehow, the minds of these analytically sophisticated thinkers turn into mush when they are forced to take seriously the policy implications of their own models. ”
——————-
Hi Timmie.

[The devil can quote scripture for his own purposes. Who could disagree with:

I have never thought of neoclassical economics as a hindrance to an understanding of social and economic problems. To the contrary, I think there are certain habits of mind that come with thinking about the world in mainstream economic terms that are quite useful: you need to state your ideas clearly, you need to ensure they are internally consistent, with clear assumptions and causal links, and you need to be rigorous in your use of empirical evidence. Now, this does not mean that neoclassical economics has all the answers or that it is all we need. Too often, people who work with mainstream economic tools lack the ambition to ask broad questions and the imagination to go outside the box they are used to working in. But that is true of all “normal science.” Truly great economists use neoclassical methods for leverage, to reach new heights of understanding, not to dumb down our understanding. Economists such as George Akerlof, Paul Krugman, and Joe Stiglitz are some of the names that come to mind who exemplify this tradition. Each of them has questioned conventional wisdom, but from within rather than from outside.

You, and mt, don’t fit that description. You don’t accept “within” as – ahem – the source you’re recommending recommends. You’d throw it all out -W]

your goose is cooked. price, prust, gionta, and pacioretti out/injured. after the seasons my boys have had i’d offer my sympathies but…well….it’s the playoffs you understand. given your time in ottawa i would have thought you a fan? i won’t abandon hope for you just yet.

@ eli
“Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made”

[…] What they don’t understand, refuse to understand, and can’t understand by the nature of their ideology, is that all of the regulations in the world won’t matter to the companies. I would go on as to why, but I think I’ll let our friends David and William explain the senselessness of this. William Connolley has this to say…. […]

[Pingbacks, eh? they come from the oddest places. I’ve looked at the whole post, and it makes rather a hash of things -W]

@WMC “Market chaos would be just one manifestation of that pain; “costing people money” is a more obvious one.”

Not to mention life – poverty is one of the greatest killers.

@Steve Easterbrook “An interesting corollary is that if and when governments are finally forced to get serious about climate policy, they will also ensure everyone invested in fossil fuel assets is appropriately compensated for the loss, to avoid any market collapse.”

Impossible. If they “compensated” investors for their loss then they’d harm everyone else either by taxes or inflation.

Real wealth can’t simply be created out of thin air. You can’t magically print enough money to make up for the wealth (goods and services) lost by limiting or eliminating fossil fuels.

William makes a sharp distinction between economics and policy, between the marketplace and regulation.

Here is a point where I think our disagreement is more than semantic. I do not believe that a clean separation is possible, even on the short time scales where I regard economics as competent and useful.

Most economic activity is not about in situ resource extraction and manufacturing. If it were, the separation might be cleaner. But not only do we have to cope with abstract property such as intellectual property and contingent rights such as real estate. We also have to cope with the fact that some of our key resources are literally fluid (not privately owned until extracted because the reservoirs cross property boundaries) or held in common or both. Economic dynamics only take hold for such resources when a marketplace is constructed, and this happens in practice as a result of legislation and regulation.

I do not know whether Rodrik, the economist whom Eli cites, is any better than Krugman or Stiglitz, whom he cites. They seem to me indeed much better than the run of the mill. (You may wish to discount my opinion somewhat because the only economics course I ever took was taught by a Keynesian.) But they are just as stuck on maximizing employment and throughput as the rest of the mainstream.

That said, Rodrik does seem to agree with me and contra WIlliam that economics is not cleanly separable from policy.

[Whether you regard the separation as clean or dirty I don’t much care. As an ex-mathematician I’d argue for clean. But suddenly your metaphor of “steering” vs “choice of destination” that seemed so attractive just a comment or two ago is looking less attractive to you? -W]

Real wealth can’t simply be created out of thin air. You can’t magically print enough money to make up for the wealth (goods and services) lost by limiting or eliminating fossil fuels.

Huh. Not even by replacing fossil fuels with renewables? And what about the public costs (i.e. externalities, including common-property goods and services lost) incurred by fossil fuel use? Are you sure you’ve fully accounted for them?

Effective action on carbon emissions is like my diet. I am going to start it, I’m just not sure when.

The market is like the manufacturer of my favourite chocolate – they have their production line going full tilt, because they don’t have any faith in me starting a diet. They may have a problem in future if I do start a diet – but they are prepared to take that gamble. Their managing director is retiring in a couple of years, and keeps muttering “Apres moi le deluge”.

WC — Two quotes from the Wikipedia article:
“Both sets of data suggest that a sudden climate threshold or tipping point occurs at about four times the Earth’s mean carbon dioxide levels relative to the baseline concentrations of about 280 ppmv that existed circa 1750.”
“The trigger for these mass extinctions appears to be a warming of the ocean caused by a rise of carbon dioxide levels to about 1000 parts per million.”

Assuming ECS=3.0 K for 2xCO2, merely 6 K warming suffices.

[Here’s anther quote: Oceanic anoxic events most commonly occurred during periods of very warm climate characterized by high levels of carbon dioxide (CO2) and mean surface temperatures probably in excess of 25 °C (77 °F). The Quaternary levels, our current period, are just 13 °C (55 °F) in comparison. How do we reconcile these apparent contradictions? I’d note that the para you’ve quoted has no citations and doesn’t actually make sense (the “Both sets of data suggest” doesn’t have a referrent – it looks like this has been cut-n-pasted from somewhere else). I think that if your sources quote the event in terms of CO2, its best to use that, rather than your own conversion into temperature -W]

Many of the climate science/renewables deniers who claim the carbon divestment movement will have no effect also whine incessantly that if not for the environment movement we would be getting all our energy from nukes.

Certainly switching over to renewables would make us poorer, otherwise we’d have done it already. However, global warming would also make us poorer – even if it turns out to be benign in the long term, in the short term we’d to rebuild a lot of infrastructure to accommodate the shifts in production.

And, since fossil fuels are in any case finite, deciding to switch to renewables sooner rather than later makes a difference only in the short term anyway.

Meanwhile, growth is not necessary linked to increased consumption of resources. When I was a child, a new transistor radio would come in a box announcing how many transistors it had in it – eight or ten or whatever. Now I’ve got a gadget in my pocket with billions of the things in it. And I guess that the amount of silicon and dopant and gold contact used is roughly the same.

Why economists should get the blame for any of this I cannot see. If you ask an economist to advise you on the relative merits of emissions licensing and emissions taxation you should get an informative answer. If you ask an economist to tell you the economically optimum trajectory for switching to renewables you should eventually get an answer, but it will have wide confidence intervals because there will be a lot of uncertainty about the model parameters – the future cost and efficiency of solar cells, or the value of a life in Bangladesh, for example. But if you ask an economist to predict future political decisions, or the nature and pace of technological development, you’re asking the wrong person.

First of all, regarding the costs of not using fossil fuels, I already said it is a judgement call, but I partially explained my reasoning – that without fossil fuel extraction and exploration we are not going to be getting a steady supply of nitrate fertilizers.

You can either address that argument or not – so far you’ve chosen the latter.

As for my statement about solar/wind being unable to replace fossil fuels, you can, for one, refer to my argument regarding nitrate fertilizers and you can also look at the world and see that there isn’t a nice place to live in the world that doesn’t rely on fossil fuels.

Solar technology has been around for well over a hundred years and has been subsidized for many decades. It isn’t an unreasonable assumption to think such technologies aren’t an adequate replacement for fossil fuels because, despite ample opportunity and motive, they haven’t done so anywhere on earth.

And that’s without looking at the specific technological and engineering challenges.

TGL, your “argument” has been addressed over and over in other venues, and shown to be fallacious. If you were interested in knowing why you’re wrong, you’d have no trouble finding authoritative sources. Having seen no sign you’re interested, there seems little point in engaging you further.

@Mal Adapted Then you should have no trouble providing a link that addresses how we would survive a lack of nitrate fertilizers by using currently existing technologies (i.e. not pie-in-the-sky hypothetical technologies in the future).

I’m still hoping to work up my own analytical post on the carbon bubble – I think it’s a real issue but not for the reasons that have gotten the most attention (stranded assets leading to share-price collapse). I believe the most important issues arise from the hit to short/medium term profitability if/when a carbon cap starts to create oversupply – a small gap between supply and demand can lead to a dramatic price crash as producers struggle for a share of a shrinking market. Equally important, however, is that much of the fossil fuel resource is counted as national assets for domestic development projects (coal in China and India being key examples) and restrictions on burning it create plausible demands for compensation.

Vis-a-vis #49 the other Paul B:
“Certainly switching over to renewables would make us poorer, otherwise we’d have done it already.”

This statement is plainly false because of the use of the word “certainly.” Even in conventional economics-land, by definition the fact that there is an unpriced externality on FF emissions means that we’re not as well off as we would be with a mix of less FF and more renewables. However, the bigger issue is that due to the nature of collective action problems, the fact that FF producers would be less well off even if we would collectively be better off means that the possible improvement could be very large and still not be taken advantage of.

The poster “Mal Adapted” got rather upset when I called such things “ambiguous hand-waving.”

If it is unpriced then it is certainly ambiguous.

In fact, if there is an unpriced cost to fossil fuel use, then by that same logic there could be unpriced benefits to counter such costs.

“means that we’re not as well off as we would be with a mix of less FF and more renewables”

That’s a non sequitur.

To break it down, your statement would only be correct if:

The net benefit of the renewables you mention exceeds the sum of the unpriced and priced benefits of fossil fuels sans the sum of the unpriced and priced costs of fossil fuels (i.e. the net benefit of fossil fuels).

If your argument relies solely on these unpriced costs then it can be logically countered with unpriced benefits.

The best thing to do is to remove such ambiguities from the equation and rely solely on variables based on solid data.

You must make the case for renewables without drawing on unpriced “externalities.”

Then you should have no trouble providing a link that addresses how we would survive a lack of nitrate fertilizers by using currently existing technologies (i.e. not pie-in-the-sky hypothetical technologies in the future).

Well, it should be self-evident that as long as there’s money to be made by doing so, some fossil hydrocarbons will continue to be extracted from one source or another, thus there will be no lack of nitrate fertilizers to survive.

And when you start providing links to evidence supporting your own assertions, perhaps I’ll do the same. Or perhaps not — you’re the one contradicting the consensus here, and I see no reason to do your research for you. Interested lurkers can find exhaustively referenced rebuttals to all your tired talking points on RealClimate and SkepticalScience, to name just two authoritative sources. For that matter, I’d love to see you make the same comments on either of them that you’re making here.

@Mal Adapted “Well, it should be self-evident that as long as there’s money to be made by doing so, some fossil hydrocarbons will continue to be extracted from one source or another, thus there will be no lack of nitrate fertilizers to survive.”

I can’t wait to see the prototypes for the solar/wind powered oil rigs. I can’t wait to see the cost/benefit analysis of using electrical vehicles to explore and drill for these resources rather than using traditional technologies.

What do you expect the price of lithium will be with all the demand for it for these devices?

Technology is not magic. There are hard limitations. Yes, in general we will advance, but we don’t know when or in what form those advancements will or can occur.

So what is your argument at this point?

That fossil fuel extraction must still occur in order to feed the world? That we’ll somehow find a way to do it using hypothetical and/or resource hungry technologies like solar/wind?

Hmm. If we remain stuck on an exponential growth path, we will run out of oil and gas soon enough to matter on planning horizons.

If we manage to dig up the clathrates that is another story. Then we can manage to cook ourselves every bit as thoroughly as you seem to desire.

But even in the extremely unlikely event that the sensitivity is less than a tenth of what we think and we do not cook, and we tap into the clathrates, we will eventually face depletion, and capitalism will have to meet the test that you deny it’s possible to overcome.

Now there is the argument that our future selves will be richer than we are, so they could better afford to surmount such problems, but there is another interesting contradiction there.

For some reason, most of the public sector is facing severe cutbacks in most places. So this would seem to call that “better afford” argument into serious question, as we have had considerable “growth” over the past few decades and now we can’t even seem to afford schoolteachers.

“But even in the extremely unlikely event that the sensitivity is less than a tenth of what we think and we do not cook, and we tap into the clathrates, we will eventually face depletion, and capitalism will have to meet the test that you deny it’s possible to overcome.”

If we are to overcome such problems then we need much better technologies.

What ingredient do we need to acquire such technologies?

Time.

If we are ultimately unable to develop our way out of it then many billions of people will suffer and/or die.

No need to rush that scenario.

In any case, such a disaster would likely be asymmetric. Africa, for example, can’t really feed itself and requires constant food aid (they need nitrate fertilizers for one thing). It is also the region with the highest population growth. I do not expect the other nations of the world to continue feeding that continent when their own peoples are in need of food.

“as we have had considerable “growth” over the past few decades and now we can’t even seem to afford schoolteachers.”

Interesting since Americans like myself are spending far more on education than we have in the past.

Perhaps it isn’t the money that is the problem, but how it is being (mis)spent.

The point is that the commonly heard “we can afford it better in the future when we are wealthier” rings hollow given that the more growth we get, the more people in public service are encouraged to tighten our belts.

The day when we can afford to make the commons better never arrives, and the arguments against doing so remain constant. So the argument seems disingenuous. At best, it is missing something important.

“The Nobel Prize–winning economist Friedrich Hayek is the leading theoretician of this movement, formulating the most genuinely political theory of capitalism on the right we’ve ever seen. The theory does not imagine a shift from government to the individual, as is often claimed by conservatives; nor does it imagine a simple shift from the state to the market or from society to the atomized self, as is sometimes claimed by the left. Rather, it recasts our understanding of politics and where it might be found.”

In fact, we have far more teachers per pupil as well (and a much greater increase in administrators). And while all these supposedly wonderful things are going up the data shows essentially zero improvement in test scores.

“However, this is much slower than GDP growth.”

That is a little harder to eye since your GDP chart starts in 1947 while your educational spending chart starts in 1985, but your statement does appear to be marginally true – other than the “much slower” part.

The problem is that I don’t see how that is relevant. We are looking at decades where the economy has drastically changed with the introduction and mass manufacturing of automobiles, PCs, cell phones, preserved foods, microwaves, refrigerators, and numerous other products which are now nearly ubiquitous in the US.

Am I to imagine that spending on education is going to take up the exact same slice of that ever-increasing pie?

Of course not, but again, why would it matter? We are spending more on students, they have smaller class sizes and almost certainly they have better-educated educators.

That is a very small period of time to look at to discern any sort of trend (esp. since the data ended 7 years ago). The methodology appears rather flawed as well – comparing the salaries of teachers (something just about anyone of moderate ability could do) with computer programmers and registered nurses is not a terribly bright idea – those are specialized skills, and, in the case of programmers, not something everyone has the mental capacity to even accomplish.

Honestly, that time period takes us directly through the dotCom bubble when computer use was greatly expanding and programmers were in far more demand.

And again – what is the point? Their salaries were rising, but not as fast as a few other professions during that period. Were their feelings hurt by this data? Did they decide not to teach as effectively since computer programmers were making more financial gains?

Your argument is essentially that better-paid teachers educate students better, but if you want to prove that then do it directly by comparing teacher wages by state. The problem is that there isn’t any such indication in the state data.

“The point is that the commonly heard “we can afford it better in the future when we are wealthier” rings hollow given that the more growth we get, the more people in public service are encouraged to tighten our belts.”

This would be nice if the public sector ever actually did tighten its belt, but currently there is much wailing and gnashing of teeth over reducing the growth of future spending – so much so that our president feels the need to intentionally cause as much pain from these reductions in order to con his way into more spending (or more likely he wishes to channel it into electoral success).

In any case, I’m not terribly interested in the whole “it will be easier to afford” argument. My personal belief is that policy decisions should be delayed until people realize that it either isn’t a big problem and/or that adaption at the local level is cheaper than altering the climate on a global level.

However, if I were to make the case that it would be cheaper to deal with climate change in the future then I’d point the finger directly at technological innovation which has a tendency to make things much cheaper over time when free markets are allowed to work – computers, automobiles, metals, cell phones, food (although government policies seem to be increasing food prices), etc.

By that logic, even if our level of wealth remained the same, the price of interventions/adaptations could very well go down.

In re #69 Worstall’s claim that this is about “revealed preferences” is ridiculous. It’s about how the market game waters down ethics. It’s well enough designed, though it’s one of those social science experiments where the outcome is almost inevitable – all you really measure is the strength of an effect. It’s almost enough to construe it as a gendankenexperiment.

===[quote]

Our paradigm for studying moral values and detrimental effects on third parties is the trade-off between a mouse life and money. In our main treatments, human subjects faced the decision to either receive no money and to save the life of a mouse, or to earn money and to accept the killing of a mouse. This paradigm involves a drastic and irreversible decision and is well suited for studying moral conflict: Although the content of morality is culturally determined and time and space contingent, there exists a basic consensus that harming others in an unjustified and intentional way is considered as immoral (15).

In all treatments of the experiment (16), which was approved by the Ethics Committee of the University of Bonn, subjects were explicitly informed about the consequences of their decision. They knew that their mouse was a young and healthy mouse, which in case it survived would in expectation live for about 2 years in an appropriate, enriched environment, jointly with a few other mice. For illustrative purposes, we presented to subjects the picture of a mouse on an instruction screen (fig. S1). The instructions informed subjects explicitly about the killing process, in case they decided to kill their mouse. The killing process was also shown in a short video that was presented to subjects (17).

The mice used in the experiment were so-called “surplus” mice: They were bred for animal experiments, but turned out to be unsuited for study, e.g., because some specific gene manipulation had failed. They were perfectly healthy, but keeping them alive would have been costly. Although it was true that the mice would live or be killed based on the decisions of subjects in the experiment, the default for this population of mice was to be killed, as is common practice in laboratories conducting animal experiments. Subjects were informed explicitly about the default in a postexperimental debriefing (18). Mice that were chosen to survive because of subjects’ decisions were purchased by the experimenters and kept in an appropriate, enriched environment. Thus, these mice survived precisely as stated in the instructions. As a consequence of our experiment, many mice that would otherwise have been killed right away were allowed to live for roughly 2 years.

Markets are institutions where sellers and buyers interact and can trade items. Trade occurs whenever a seller and a buyer agree on a price. For our main result, we analyzed three different conditions (see table S1): an individual treatment in which subjects decided between the life of their mouse and a given monetary amount, a bilateral trading market, and a multilateral trading market. Treatment assignment was random. The individual treatment serves as a benchmark and comparison standard for decisions made in markets. The bilateral market is the most basic form of a market situation with one buyer and one seller bargaining over prices in order to trade. In the multilateral market, many buyers and sellers potentially trade with each other. In comparing decisions from the individual treatment to decisions made in markets, we abstract away from the question of whether a good is priced at all. In all treatments, subjects could exchange life for money.

In the individual treatment, subjects faced a simple binary choice, labeled option A and option B. Option A implied that the mouse would survive and that the subject would receive no money. Option B implied the killing of the mouse and receiving 10 euros. This treatment informs us about the fraction of subjects who are willing to kill the mouse for 10 euros. One hundred and twenty-four subjects participated in this treatment.

To study markets, we implemented the so-called double auction market institution, which is widely used in economics to investigate market outcomes [for an overview, see (19)]. In the bilateral double auction market, one seller and one buyer bargained over killing a mouse for a total gain of 20 euros that the two parties could split up between themselves. The seller was endowed with a mouse. As in the individual treatment, he or she was explicitly told that the “life of the mouse is entrusted to your care.” Bargaining over the 20 euros was conducted during a continuous auction, i.e., buyer and seller could make as many price offers as they liked (16). If a buyer and a seller agreed on a trade, the buyer received 20 euros minus the price agreed upon. The seller received the price. In addition, the mouse of the seller was killed, reflecting a situation in which trade takes place to the detriment of a third party. If a seller or a buyer did not trade, earnings for both were zero and the mouse survived. A seller in the bilateral market was in the same situation as a subject in the individual treatment in that he or she could either refuse a monetary amount or accept a monetary amount and kill a mouse. Subjects were told that no market participant was forced to make price offers or to accept an offer, that their mouse would be killed only if a trade occurred, and that the mouse would survive if they decided not to trade. There were 10 trading periods. Seventy-two subjects participated in this treatment.

The multilateral double auction market treatment was exactly like the bilateral market treatment, except that in this condition seven buyers and nine sellers bargained over prices (16). The nine sellers were all endowed with one mouse each. Subjects on both sides of the market could make as many price offers as they liked. All subjects could accept a price offer from the other side of the market. Available price offers of both market sides were always shown on a screen. Once a price offer of a trader was accepted, trade occurred implying the killing of a mouse. Payoff consequences were identical to those of the bilateral market. There were 10 periods. We ran six sessions with a total of 96 subjects.

To allow for further analyses, we ran several additional treatments (for details see below). In the individual price-list treatment, we offered subjects a menu of prices to elicit the monetary amount needed to pay subjects to make them indifferent between killing and receiving money. To establish a benchmark in terms of how markets affect morally neutral values, we conducted an individual price-list treatment and a multilateral market treatment analogously to the mouse treatments, but for a consumption good. Finally, we ran two further control treatments based on the individual treatment. In sum, we ran nine treatments with a total of 787 subjects.

Our key hypothesis was that markets would display a tendency to erode moral standards, relative to individual decision-making, because of three essential features of market interaction. First, in markets, it takes two people who agree on trading to complete a trade, implying that responsibility and feelings of guilt may be shared and thus diminished (20, 21). Second, market interaction reveals social information about prevailing norms. Observing others trading and ignoring moral standards may make the pursuit of self-interest ethically permissible, leading further individuals to engage in trade. In addition, the mere existence of a market may provide social information about the appropriateness of trading, rendering the killing of mice more allowable (22, 23). Third, markets provide a strong framing and focus on materialistic aspects such as bargaining, negotiation, and competition, and may divert attention from possible adverse consequences and moral implications of trading (11, 24). In contrast to our market conditions, subjects in the individual condition do not interact with other subjects and therefore receive no social information, do not share responsibility if they trade, and are not exposed to a market framing.

These three features are present in all markets, even in simple bilateral markets. In addition, in the multilateral market with its presence of competing sellers, the notion of being pivotal may be diffused as well (25); unless a seller cares specifically about his own mouse, he may argue that if he does not trade his mouse with some buyer, another seller may conclude the trade with that buyer, selling and killing his mouse. This common feature of markets may make subjects feel less responsible, rendering it more difficult to sustain moral values even if values per se remain unchanged. In sum, we therefore expected a higher willingness to kill in the bilateral and the multilateral market compared to individual decision-making. In addition, owing to notions of being less pivotal, the killing rate was expected to be even higher in the multilateral than in the bilateral market. We further hypothesized that the decay of moral values would also be reflected in prices, such that mice would be killed for lower prices in the market treatments compared to the individual treatments. Finally, we studied markets where the cost of trading involves opportunity costs of consumption rather than moral costs. For these morally neutral consumption good markets, we hypothesized no decline of values through market interaction.

[end quote]===

[I agree that Timmy seems to have got this wrong. Or indeed perhaps not even read it. I’ve asked him, but I expect embarrassed silence. There do seem to be some loose ends here, though:

It wasn’t entirely clear to me whether the individual-choice kill-a-mouse option was computer based (as the trading was, I think) or face to face. That would make a difference.

This is posed as an ethics question. Clearly, we’re supposed to think that its unethical to kill a mouse. And yet that’s exactly what happens all the time, and the mouse researchers all accept it as part of the job. So I’m dubious about that.

And then just when it was getting interesting you ended the quote. How does the story end? -W]

“In re #69 Worstall’s claim that this is about “revealed preferences” is ridiculous”

How so? All that revealed preferences means is what people actually do. That’s the point and strength of it.

[Well, I apologise for suggesting you might not respond.

But its not clear to me, either, why this is revealed preferences. I’d consider this to be RP if, say, people were asked “how much would you pay to save a mouse” and they said “ooooh, perhaps £50″. And then you ran the experiment and they turned out to only offer £10. Or whatever. But discovering (if that is what has been done) that in one situation you value a life at X, and then framing the question differently the life is valued at Y != X – that doesn’t sound like RP to me -W]

What is very amusing about this study is that we’re actually seeing how collective decisions are less moral (as defined) than individual ones. Interesting implications for those who insist upon collectivism of course…..

And yes, this is really what we’re seeing. Individuals with individual responsibility are, according to the tenets of the experiment, acting more morally than individuals in groups interacting. Something of a bugger for voting on things, eh?

>> Individuals with individual responsibility are, according to the tenets of the
>> experiment, acting more morally than individuals in groups interacting.
>> Something of a bugger for voting on things, eh?

> it is amazing how quickly Tim Worstall identifies market-based
> decisions as “collective” when it suits him.

Remember, the emperors lost control when burghers and villagers started this “trade” thing rather than turning in what they produced, and taking what they were granted.

What the mouse experiment shows is that individuals when interacting with other individuals (the person running the experiment) don’t want to appear callous to another. If they really wanted to get at the mouse/antimouse value the experiment would be run double blind with an ATM maching. OTOH, this would be an interesting experiment as is looking at the response of micro and macro economists.

I’ve been reading off and on through this blog post. Thanks for putting it up, WC. Just one or two things I’d like to add:

Ah, but that’s where I think you’re wrong (or at least ambiguous and confusing to anyone reading from the world of economics). We don’t need to “invent a new discipline of economics” AFAIK. We need to improve economics, yes, but not in revolutionary ways – for the basic theory. We need to use economics differently.

No, we need to ditch the current dominant (neoclassical) theory and replace it with something that is rooted in biophysical realities and doesn’t have perpetual growth as the engine that doesn’t have a gear for reverse or running stationary.

Neoclassical economics isn’t all of economics, although it might seem that way after so many decades of domination, a whole culture that has evolved out of it, and economics faculties brainwashing willing students all over the world.

I’ve been reading some stuff about the history of economics lately, and am beginning to become aware just how much the brilliant work of people like Smith and Ricardo has been raped and distorted to justify all of the immoral aspects of globalisation and overconsumption.

It’s insane. Truly insane.

[Well, I’m baffled. You get close to the right answer at the end, but somehow don’t see the contradiction to your start. Like I say: econ theory is fine. Your complaint is just the overemphasis on one branch. As to the “perpetual growth” “problem” – well, its a good model for the past. If you want to propose a different model for the future, you’ll need to do so in detail, having first actually understood econ theory (I keep saying that to mt; I suppose I should admit that *I* don’t understand econ theory) -W]

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